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Saturday, August 10, 2013

During
the Great Recession, many central banks reduced their interest rates to
historically low levels. However, the interest rate was good to be its zero
point, it remained higher than the natural rate, that is to say, the nominal
interest rate which closes the output gap and ensure price stability. However,
once the zero lower bound is reached, the central bank may further cut its key
interest rate, which exposes the economy to deflationary pressures and an
increase in its unemployment rate. In such a situation called liquidity trap,
where monetary policy is proving excessively restrictive fiscal authorities
must necessarily intervene to counteract deflationary pressures. The finance
managers adopt their next steps "unconventional" to make them more
effective monetary policy. However, the Great Recession is different from
previous episodes of liquidity trap, including the lost decade in Japan, that
the phenomenon of liquidity trap this time has a global dimension. The United States,
UK and the other Euro countries are the countries most closely linked by trade
and financial linkages that have experienced the largest slowdown in crisis,
bringing their monetary authorities to fix the interest rate to the nearest
zero.
According to famous Economist, the appearance of liquidity traps in a context
where markets for goods, services and capital are integrated internationally
gives a new dimension to the dilemma highlighted by the literature in finance
International (also called "impossible trinity" or "impossible
trinity"). The traditional interpretation of this phenomenon, a country cannot
simultaneously ensure the opening of capital markets, fixed exchange rates and
monetary policy autonomy. If achieved two goals, the third becomes unattainable.
However, even if the exchange rate is flexible and fully opens capital markets,
monetary policy loses its effectiveness in a liquidity trap. If the domestic
economy is a powerful external shock depressing domestic demand, the zero lower
bound is likely to constrain its own monetary policy. Financial markets play a
key role in the spread of the phenomenon of liquidity trap a country to
another.
The economic literature have suggested that the introduction of capital
controls to reduce the risk that a country will suffer destabilizing capital
inflows: inflows are indeed likely to fuel an unsustainable credit expansion,
the formation of bubbles assets and excessive currency appreciation, especially
in emerging countries. The introduction of capital controls makes monetary
policy more effective in reducing the risk that the economy switches into a
liquidity trap.